How do I Calculate ROC?

This is a brief look at how to calculate ROC.

ROC or rate of change, is a technical indicator used in the financial markets to calculate the percentage change between the current price of an asset and prices that it has attained in the past. It is a momentum indicator, and ranks along with indicators like the Relativity Strength Index or the Stochastic oscillator.

Another definition refers to ROC as the margin between the present price of an asset and the price that previously existed “n” time periods ago.

In calculating ROC, a base value of 0 is assumed, so that if there is an increase in upwards momentum of the asset being measured, it is assigned a value that is greater than 0. Conversely, if there is a downward momentum, then a figure less than 0 is assigned.

The Rate of Change (ROC) indicator is a good indicator to use when carrying out divergence trades, in which case, a divergence between the ROC indicator and the price of the asset can give an indication of the future direction of the price of that asset. For instance, if the ROC is increasing and the price of the asset is heading in a bearish direction, it is a “heads up” call; the price of that asset may just be on its way to a bullish reversal. The reverse is also true. A divergence situation where the ROC is decreasing and the price of the asset is increasing is an indication that the price of the asset may be on its way to a bearish reversal.

Calculating ROC

10 days is the normal time frame used in calculating ROC. The calculation formula is as follows:

Rate of Change (ROC) = 100 (Y/Yx)

where “Y” is the most recent closing price of the asset, and Yx represents the closing price on a specified date in the past. If it is seen that the most recent close of the asset is lower than what it was more than 10 days back, it shows that the ROC base point is below the equilibrium which indicates that prices are dropping. The converse is also true. If latest close > close 10 days back, then ROC base point is above equilibrium point and prices are rising.

In essence, the ROC can be used by forex traders to generate bullish or bearish signals.

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